What are the returns like in a real estate syndication?

Question

As with most investment vehicles, people are attracted by and curious about the possible returns. By investing passively in a real estate syndication, you can earn two types of returns: cash flow and profit split.

Cash flow returns are checks or direct deposits (typically on a monthly basis) from the time the deal closes until the asset is sold. Profit split returns are where the investors literally split the profit from the sale of the asset according to the structure outlined in the contract.

Here’s a great example, using round numbers for ease. Let’s pretend you invest $100K. You can look forward to a possible 8-10% in cash flow returns, meaning about $8K per year, which is about $667 per month.

Additionally, when the asset is sold (5 years later-ish), you could expect up to 40-60% returns on your initial capital investment. This means you’ll receive your $100K back (initial investment), plus maybe $50K in profit.

Adding it up in your head yet? Seeing $$$$$? Yep.

$8K cash flow returns per year + $50K in profit at the sale means you would have turned $100k into $200K in about 5 years.

Now, of course this all comes with the caveat that these are estimated returns that can vary based on market conditions, location, the deal structure, and many more variables. In no way is it guaranteed that you’d double your money. We’re saying it’s seriously possible though.

This is just one example of how returns work in syndications. Does anyone else had a different experience?

Paul Moore · Answer

Thanks @Justin G.. I would remind prospective investors that -- though these returns are "normal" these days, they are not normal overall.  The rising tide has raised all boats for the past decade+.

I would also recommend that investors ask syndicators if they are over-raising to provide extra cash to fund investor distributions in the first year.  This is a form of speculation since syndicators are counting on appreciation to make their projected returns work.  This is not the type of deal I would invest in, but to each his own.

Aaron W. · Answer

@Justin G. Syndications are a great way to invest in real estate if you don't have time to be active or don't want to spend time doing it. Not only do you get decent returns, you are also an owner of the property which means you get tax benefits from the depreciation which will offset the taxes on cash flow. Bottom line, you will pay little to no taxes on your cash flow.

You must, however, vet the sponsor. There are many ways to manipulate the numbers to make returns look rosy. You should feel comfortable working with the sponsor and they must be willing to openly communicate with you about the deal and the investments. Things will not always go well while investing in real estate and a syndication is no different. The sponsor should be communicating the good and the bad, while explaining what they are doing to mitigate the negatives.

David Lilley · Answer

Under promising should be irrelevant to this post. I think the readers are here to find out how much you can actually make in this type of investment.

As far as the legality of over promising, there is nothing illegal about it. However, without the right disclosures and legal filings, yes, you can be sued for getting it wrong.

Justin Goodin · Answer

Yes, these are conservative projections but it's better to underpromise and over deliver.

Justin Goodin · Answer

100%!! This is why I constantly say analyze the sponsor FIRST and the deal second. Ask questions about their track record, their team, and what makes them unique. The underwriting is a crucial part. Yes, anyone can make the numbers look good. I totally think you should have a general understanding of underwriting to evaluate how realistic the pro forma is. Don't be afraid to ask a lot of questions!

David Lilley · Answer

The above are conservative estimates. In our syndications, our LPs typically achieve a 1.75x - 2x equity multiple in 2-3 years and as the GP, I achieve a 2-4x on my investment.

The more active you are in the investment the faster you will grow your capital.

Paul Moore · Answer

Hi @Justin G.. We look for anomalies. Syndicators who acquire from mom-and-pop sellers where they can get outsized returns.  Some of them are 40%+ IRR historically.   Others are consistently around 18-25% annual returns.

Justin Goodin · Answer

Great point! Good deals are certainly tough to come by but they still exist. Again, this was just an example. What returns do you look for in deals?

Justin Goodin · Answer

Hey Joe, I’m not promising anything nor am I talking about any deal at all. Going by the title, I am simply giving real life examples of what investors can expect in a typical syndication structure. Thanks for the feedback.

Joe Splitrock · Answer

Correct me if I am wrong, but as syndicators isn't it actually illegal for you to overpromise? Most prospectus I have read have gigantic disclaimers.

As a moderator, I also wanted to caution that since you are all in the syndication business, proceed with caution. This entire discussion is really walking the line of self promotion, which is not allowed on BP. Thanks for your understanding.

What are the returns like in a real estate syndication?

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